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The Commissioner Of ... v. Thevara Patasala, By...
Factual and Procedural Background
The facts are presented in a case stated by the Commissioner. A Hindu joint family, on partition, agreed to set aside Rs. 15,000 of family property to create a trust for establishing a Thevara Patasala (a school for teaching Hindu Tamil hymns). The trust directed that after erecting a building the balance should be invested in the purchase of lands, and that the Patasala should be run on the income derived from those lands. The trustees, instead of following the direction to invest in land, invested (in some shape or form) in a rice mill, carried on the business of milling rice and derived income from it. The Crown contended that the income from the rice mill was taxable as profits of a business. The opinion addresses whether those proceeds are assessable to income-tax and concludes accordingly.
Legal Issues Presented
- Whether the income derived from the rice mill — an enterprise carried on by the trustees in place of the directed investment in land — is assessable to income-tax as profits of a business rather than as income of property held under a trust for religious or charitable purposes.
- Whether the fact that the investment in the rice mill constituted a forbidden investment and thus a breach of trust affects the taxability of the income (i.e., whether a breach of trust alters the Crown's claim to tax the profits).
Arguments of the Parties
Crown's Arguments
- The proceeds derived from the rice mill are profits of a business and therefore assessable to income-tax.
- Even though the trust's governing document indicated that the investment in the rice mill was forbidden (a breach of trust), the Crown's position is that that breach does not prevent taxation of profits as business income; matters arising from breach (between cestui que trust and trustees) are separate and do not affect the Crown's assessment.
The opinion does not set out a detailed account of any opposing submissions by the trustees or other parties beyond acknowledging the trust's terms and the fact of the forbidden investment.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Coman v. Governors of the Rotunda Hospital, Dublin | The principle that a charitable institution which raises funds by carrying on a business in competition with others who must pay income-tax is liable to pay income-tax on the profits, notwithstanding that surplus profits go to charitable objects. | The court treated this authority as clearly establishing the rule applicable to the facts and relied upon it to hold that the rice mill proceeds are assessable to income-tax. |
| In the matter of Lakshman Das Narain Das | Cited as a subsequent case following the same principle as established in Coman. | Used as further support for the principle that charitable institutions carrying on business activities are liable to income-tax on business profits; cited as a recent following authority. |
Court's Reasoning and Analysis
The court first accepted that a valid trust was created by the partition agreement: Rs. 15,000 was set aside to establish a Thevara Patasala, and the balance (after building) was directed to be invested in land to produce income for the school. That trust obligation was binding and could not be renounced by parties without committing a breach of trust.
The trustees, however, did not invest in land but invested in a rice mill and carried on the business of milling rice, deriving income therefrom. The court framed the issue as whether those proceeds were taxable as business profits. It observed that if the proceeds are business profits they cannot simultaneously qualify as income derived from property held under trust wholly for religious or charitable purposes.
The court noted the further complication that the document itself showed the rice mill investment to be forbidden — i.e., a breach of trust. The Crown argued (and the court acknowledged) that even if there was a breach of trust, that raises questions between cestui que trust and trustees but does not affect the Crown's right to tax the profits. The court expressly did not decide the internal trust remedies or whether trustees could recharge the institution with taxes paid to the Crown.
Relying on established English authorities (specifically Coman v. Governors of the Rotunda Hospital, Dublin, and the later In the matter of Lakshman Das Narain Das), and accepting the view of the Allahabad High Court, the court applied the principle that a charitable institution which carries on a competitive business to raise funds must pay income-tax on the profits of that business. On that basis the court concluded that the rice mill proceeds are assessable to income-tax.
The court concluded by naming the person to be declared assessable and to bear costs in the reference.
Holding and Implications
Holding: The court held that the proceeds derived from carrying on the rice mill are assessable to income-tax. The court declared the manager, Arunachalam Chetti, to be the person assessable and ordered him to pay the costs of the reference, including a pleader's fee of Rs. 150.
Implications: The direct effect is that the income from the rice mill is taxable as business profits and the named manager is made liable for the tax assessment and costs. The court relied on existing English authorities and the view of the Allahabad High Court; it did not purport to lay down a new precedent beyond applying those authorities. The court explicitly refrained from deciding internal trust questions arising from the trustees' forbidden investment.
Sir Murray Coutts Trotter, C.J:— The facts in this case are sufficiently set out in the case stated by the Commissioner, and they are shortly these—that a Hindu joint family entered into a partition and agreed among themselves that Rs. 15,000 of the family property should be set aside for a trust purpose, which purpose was to establish a Thevara Patasala, that is a school for teaching Hindu Tamil hymns, and that the income from the balance of the amount after erecting a building was to be used for the upkeep and carrying on of the school. The direction was that balance was to be invested in the purchase of lands and that it was on the income arising from those lands the Patasala should be run. Now in these circumstances we entertain no doubt that there was a creation of a valid trust and one from which none of the parties or its members could possibly have resiled without committing a breach of trust. The question now arises in consequence of what the trustees did. Instead of investing the balance after building the school in lands, they in some shape or form invested them in a rice mill; apparently they purchased it and they carried on there the business of milling rice and derived income from it. The point taken by the Crown is that on that income they are liable to be taxed as being the profits of the business. It is quite clear to our minds that if they are the profits of a business they cannot at the same time be income derived from property held under trust wholly for religious or charitable purposes. The question was at first sight a little complicated by the fact which appears on the face of the document that this was a forbidden investment and that to put the money into this rice mill was a clear breach of trust on the part of the trustees. But on reflection the answer of the Crown appears to be that even assuming it to be a breach of trust, that is a matter which raises questions no doubt as between the cesti qui trust and the trustees and it may be that the trustees will not be able to charge the institution with any part of the profits that is taken from them by the Crown in the form of taxes. On that we express no opinion. But it does not in the least affect the position. The English authorities are quite clear that if an institution which primarily exists for charitable purposes chooses to raise funds for those purposes by carrying on a business in competition with other persons who have to pay income-tax, they like them will have to pay income-tax notwithstanding the fact that the ultimate surplus of the profits is all going to the charitable object. In our opinion, that is clearly laid down in Coman v. Governors of the Rotunda Hospital, Dublin, which has been followed in the subsequent cases, and only the other day in In the matter of Lakshman Das Narain Das. We think that principle applies quite clearly to the Indian Act as the Allahabad High Court holds and that the answer to this reference must be that the proceeds derived from the carrying on of this rice mill are assessable to income-tax. The person whom we declare to be assessable and whom we make to pay the costs of this reference including a pleader's fees of Rs. 150 is the manager Arunachalam Chetti.
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